Large private sector banks usually chase people for selling third party products. Their "preferred clients" are those holding a sizable balance in their savings bank account or the people receiving high-value credits in their accounts frequently. Insurance policies, mutual funds, and structured products are prominent third party offerings that banks aggressively promote. In return, they earn commissions. It has been found that banks often try to market products of the same group/company. For example, Axis Banks primarily distributes schemes of Axis Mutual Fund, ICICI Bank pushes schemes of ICICI Mutual Fund, and so on. Despite the exposé of their biased approach, banks remain determinded to sell products with vested interests.

Are banks following the biased approach?

Name of the Bank	Who contributes significantly to their mutual fund commission income?
Axis Bank	Earns 66% of its commissions from Axis Mutual Fund
ICICI Bank	Earns 61% of its commissions from ICICI Mutual Fund
HDFC Bank	Earns 35% of its commissions from HDFC Mutual Fund
Kotak Bank	Earns 28% of its commissions from Kotak Mutual Fund

*Data as on August 08, 2016
(Source: Economic Times, PersonalFN Research)

The diagram given above will help you understand how utilising the branch network of the same group company helps retain profits within the group and assists in the wealth maximisation. In the example above, Bank X distributes the schemes of mutual fund Z. The interesting part is, Z claims commissions paid to X as an expense although Bank X, the payee, is the same group company. In short, Z is banking on the branch network and the relationships of X. Since "Y" is a wholly owned subsidiary of "X", "X" can indirectly control many decisions including the rate of commission it receives. Unlike, in the case of others, "Z" may not negotiate with "X" to minimise the charges paid.

Why blame only banks? It seems many institutional mutual fund distributors have an inclination towards select mutual funds that pay them higher commissions. Many of India's top mutual fund distributors derive atleast 20% of their income from a single fund house. NJ IndiaInvest, Citi Bank, Darshan Services, and SPA Capital are a few examples, apart from the private sector banks mentioned above. To curb malpractices in the distribution channel of mutual funds, the SEBI has introduced strict guidelines. But all efforts have fallen short to discourage biased distributors, at least as of now.

The short-sighted approach of mutual funds has negatively impacted the overall development of the mutual fund industry in India. From time to time, PersonalFN has warned investors against these malpractices conducted by the mutual fund distributors and has appealed distributors to be more responsible and ethical.

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Consider this too…
Merely because a few fund houses account for the majority commission income of a particular brokerage company or a distributor house doesn't make it a bad distributor. If it offers selective well-performing schemes of a few fund houses, it may still derive a bulk of its income from a handful players.

Investors, keep this in mind...
If your mutual fund advisor tries to push a scheme without explaining concrete reasons or without elaborating on the superiority of the suggested scheme on various parameters that benefit you, avoid investing in the scheme.

PersonalFN offers unbiased mutual fund research services and unlike many other mutual fund advisors, its advice is backed by solid research and diligent monitoring.
 

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